For almost 80 years the Arizona Arbitration
Act has contained an exclusion for employment agreements.
This year, the Arizona Supreme Court was called upon
to determine whether that exclusion applied to all
arbitration agreements between employers and employees,
or just arbitration agreements found in collective
bargaining contracts. NorthValley Emergency
Specialists, L.L.C. v. Santana, 93 P. 3d 501 (
Ariz. 2003). The Court’s holding is straightforward.
The Court held that the exclusion in the Arizona Arbitration
Act (the “Arizona Act”) for arbitration
agreements “between employers and employees or
their respective representatives,” A.R.S. § 12-1517,
exempts from the Arizona Act “all arbitration
agreements between employers and employees.” Id.
at 502.

Does the Court’s opinion mean that arbitration
agreements between employers and employees in Arizona
are no longer enforceable? No, it does not because
the Court was not called upon to consider the relationship
between the Arizona Act and the Federal Arbitration
Act (the “FAA”).

Because the Court was not asked to consider the relationship
between the Arizona Act and the FAA, the practical
significance of the Court’s ruling is quite narrow.
It is the opinion of the author that the decision has
extremely limited impact as the exclusion for employment
agreements in the Arizona Act, as interpreted by the
Supreme Court, is preempted to the extent the agreement
is covered by the FAA. The FAA applies to any “contract
evidencing a transaction involving commerce” which
under interpretations of the United States Supreme
Court, makes the FAA applicable to virtually every
employment relationship.

The Federal Arbitration Act

The FAA is not only a procedural statute that may
be invoked in federal and state court, the United States
Supreme Court has found it to be a substantive statute
prohibiting state laws that single out arbitration
agreements as unenforceable on grounds not common to
all contracts. “In enacting § 2 of the [FAA],
Congress declared a national policy favoring arbitration
and withdrew the power of the states to require a judicial
forum for the resolution of claims which the contracting
parties agreed to resolve by arbitration.” Southland
Corp. v. Keating, 465 U.S. 1, 10 (1984).

In subsequent decisions, the Supreme Court has found
that the FAA preempts state laws which interfere with
or limit the ability of parties to enter into arbitration
agreements. Although parties may challenge arbitration
agreements on the same grounds applicable to all contracts,
states may not impose barriers to arbitration that
are unique to those agreements.

Courts may not, however, invalidate arbitration agreements
under state laws applicable only to arbitration provisions.
[W]e have several times said, Congress precluded States
from singling out arbitration provisions for suspect
status.

Doctor’s Assoc., Inc. v. Casarotto,
517 U.S. 681, 687 (1996). In Doctor’s Assoc.,
the Supreme Court invalidated a Montana statute finding
it preempted by the FAA. The statute required that
for an arbitration provision to be enforceable, notice
of arbitration must be typed on the first page of the
contract in underlined capital letters. The Court found
the Montana law to be one not applicable to contracts
generally and therefore preempted by the FAA.

Because the Arizona Act has been interpreted by the
Arizona Supreme Court to apply to all employment contracts
and not just those involving collective bargaining
agreements (which are not covered by the FAA), A.R.S. § 12-1517
constitutes a state law restricting arbitration on
grounds not applicable to contracts generally. Thus,
for those contracts “evidencing a transaction
involving commerce,” the FAA governs and the
Arizona Act is preempted. The important question that
must be answered then is what is meant by a “transaction
involving commerce.”

There is a preliminary subject that must be covered
first. There is an exclusion in the FAA for “contracts
of employment of seamen, railroad employees, or any
other class of workers engaged in foreign or interstate
commerce.” 9 U.S.C. § 1. Most courts of
appeal found this exclusion to be limited to transportation
workers. The Ninth Circuit Court of Appeals, however,
held that the exclusion applied to all employment agreements,
thus calling into question the applicability of the
FAA to every employment relationship.

But in 2001, the United States Supreme Court rejected
the Ninth Circuit interpretation, holding that the
exclusion in the FAA was narrow, applicable only to
those workers engaged in interstate transportation. Circuit
City Stores, Inc. v. Adams, 532 U.S. 105 (2001).
Thus, so long as workers are not actually engaged in
interstate transportation, and as long as the arbitration
agreement is contained in a contract “evidencing
a transaction involving commerce,” all other
employment relationships are covered by the FAA.

So, what is a transaction involving commerce? It
is to that question we now turn.

“A Transaction Involving Commerce”

Because the FAA preempts state laws
that target the enforceability of arbitration agreements,
the Arizona Supreme Court decision in North Valley
Emergency Specialists will impact employment agreements
only to the extent the ruling is not preempted by the
FAA. As the FAA applies to all contracts “evidencing
a transaction involving commerce,” to ascertain
the impact of North Valley Emergency Specialists one
must determine the scope and breadth of the FAA’s
preemptive power.

The United States Supreme Court has considered this
question in two recent cases. In the first case, Allied-Bruce
Terminix Companies, Inc. v. Dobson, 513 U.S. 265
(1995), the Court considered whether “commerce” should
be viewed broadly, extending the FAA to the limits
of Congress’s Commerce Clause power, or narrowly
limiting the coverage of the FAA to cases where interstate
commerce is contemplated by the parties. In finding
the expansive interpretation correct, the Court first
observed that the words “involving commerce” are
broader than the more commonly used words “in
commerce,” therefore concluding that the words
cover more than simply persons or activities within
the “flow of interstate commerce.” Thus,
the Court held that the term “involving commerce” as
used in the FAA “signals an intent to exercise
Congress’s commerce power to the full.” Id.
at 277.

The Court also examined whether the words “evidencing
a transaction” involving commerce meant that
the transaction must turn out to have involved interstate
commerce. Even if the parties did not “contemplate” involvement
with interstate commerce, the FAA will apply so long
as the parties’ agreement does, in fact, “involve” interstate
commerce. The Court was not called upon to address
the obvious next question—must the contract at
issue itself involve commerce, or is it the type of
contract in general, that involves commerce. The Supreme
Court answered that question last year.

In Citizens Bank v. Alafabco, Inc., 539
U.S. 52 (2003), the Court was asked to decide whether
the parties’ debt restructuring agreement was
a contact evidencing a transaction involving commerce
within the meaning of the FAA. In that case, an Alabama
lending institution sought to compel arbitration in
a dispute with an Alabama corporation. The Supreme
Court held that the agreement between only Alabama
businesses nevertheless involved commerce. Noting that
Alafabco did business outside of Alabama, and that
its security for the debt included inventory outside
Alabama, the Court went on to explain its dispositive
reason.

The Court said that the proper focus of the inquiry
is not upon the individual transaction, but upon “consideration
of the ‘general practice’ those transactions
represent.” Id. at 58. The Court further
stated that the broad impact of commercial lending
on the national economy was certainly subject to Congress’s
power to regulate that activity pursuant to the Commerce
Clause.

Thus, the proper focus to determine whether the FAA
applies to a particular agreement is to look beyond
the individual agreement to ask whether in the aggregate
such agreements would fall within the purview of the
Commerce Clause. One federal district court put it
this way:

[I]f the aggregation of the impact of performing
a certain discrete activity has a substantial affect
on interstate commerce, then an individual’s
performance of the activity may be regulated by Congress,
even if the individual’s acts are local in nature.

University of Alabama Foundation
v. Walley, 2001 WL 237309 (M.D. Ala. 2001).
And in a case not involving the FAA but one examining
the scope of Congress’s Commerce Clause power,
the United State Supreme Court has made clear that “[e]ven
activity that is purely intrastate in character may
be regulated by Congress, where the activity, combined
with like conduct by others similarly situated, affects
commerce among the States.” Fry v. United States,
421 U.S. 542, 547 (1975).

It is difficult to imagine any employment relationship
taken in the aggregate, that would not affect commerce.
Indeed, Congress has exercised broad power in regulating
employment through such statutes as Title VII, the
Americans with Disabilities Act, the Age Discrimination
in Employment Act, and the Family and Medical Leave
Act. Although these statutes are not applicable to
smaller employers, such limitations do not manifest
a limitation on Congress’s Commerce Clause power,
but rather reflect a legislative judgment by Congress
to not place employment restrictions on smaller employers.

Conclusion

In view of the broad scope of the
Commerce Clause power of Congress and because the FAA’s
reach extends to the fullest limit of that power, it
would appear that most employment relationships are
governed by the FAA. Therefore, the Arizona Supreme
Court’s holding in NorthValley Emergency
Specialists, L.L.C. v. Santana is interesting,
but in practical terms, it should not affect the enforceability
of the vast majority of arbitration provisions in employment
relationships.